China reported slower growth in the first quarter of the year. Q1 2015 GDP, which is a proxy for economic output, grew at 7% year-on-year (YoY) versus growth of 7.3-7.5% last year and 7.5-7.9% in 2013.¹

The culprit is slower investment growth and excess capacity; with old industries bearing the brunt of the slowdown. The Chinese economy, which has driven about half of total global growth in the last decade, is transitioning away from capital intensive industries towards a services and consumer led economy. This benefits NZ’s soft-commodity exporters and partly explains why NZD/AUD cross is close to parity.

Sceptics in the media have also recently pointed to the excesses of China’s building boom, including the often cited “ghost cities”.

The size and scope of China’s property market is quite unique. China has over 150 cities with populations of over 1 million. Many of these people purchase apartments as opposed to houses, and they are required to place large up-front deposits meaning they carry far less debt than we are used to seeing.

The UK Daily Mail first reported on Chinese “ghost cities” back in 2010 followed by the US programme 60 Minutes in 2013 calling the eastern new district of Zhengzhou a “ghost town” with miles and miles of empty apartments and shopping malls.  

This may have been true when the stories aired, but things have certainly changed. In 2012 Zhengzhou’s occupancy rate was just 20-30%, but by May 2014 the occupancy rate had increased to 50-60%;² new subway lines to the new districts undoubtedly helped. Zhengzhou is a ghost city no more.

However, it would also be wrong to assume that no overbuilding has occurred. Zhengzhou’s new district was located next to an old town with population of some 6 million and is considered as a tier 2 city in China. The outlook for smaller tier 3 and 4 towns and rural areas is much more challenging as these communities offer fewer well-paid jobs compared to the large cities.

This is why sweeping generalisations can be dangerous. One-sided bearish views that China has overbuilt and is due a crash or a fully bullish view that China can continue to grow at unprecedented speed, will both probably prove incorrect.

In response to government policies designed to increase money in the banking system, speed up infrastructure projects, and stabilise home prices by lowering deposit requirements, stock markets in China have been on a tear this year, with Shanghai up 40% and Hong Kong up 20%¹. The stock market is also seen by locals as a rewarding alternative to domestic property investments – an argument that applies to overseas home buying in cities like Auckland, Sydney and Melbourne as well.

At Milford, we have positioned the Global Fund to be diversified and opportunistic. As such, our small group Hong Kong and Mainland listed companies with established, profitable businesses and long term growth potential have been contributing to returns this year.


Felix Fok

Portfolio Manager

Sources: ¹ Bloomberg; ² South China Morning Post: Standard Chartered Bank